US Fed holds rate, affirms patience, economy solid

By CentralBankNews.info The Federal Reserve kept its benchmark federal funds rate unchanged at 2.25 to 2.50 percent, as widely expected, and reiterated its guidance from the last two policy meetings that it “will be patient as it determines” future changes to its rate in light of global economic and financial developments. The U.S. central bank, which in March slashed its forecast for rate hikes this year to zero from a previous forecast of two rate hikes, said the latest economic data showed continued strength in the labour market and economic activity rising at a “solid rate,” a more upbeat view than last time when it said economic activity had slowed from the fourth quarter. However, the Fed’s policy-making body, the Federal Open Market Committee (FOMC), added “growth in household spending and business fixed investment slowed in the first quarter.” The FOMC also noted overall inflation and inflation for items other than food and energy “have declined and are running below 2 percent” as compared with its March statement when it overall inflation had fallen due to lower energy prices while inflation for items other than food and energy remains near 2 percent. The Fed’s latest policy decision comes amid growing signs of a slowing U.S. economy, something the Fed acknowledged in March when it lowered its 2019 growth forecast to 2.1 percent from 2.3 percent and the 2020 forecast to 1.9 percent from 2.0 percent. The Institute for Supply Management (ISM) latest survey showed U.S. manufacturing growth at 52.8 in April, still expanding but at the lowest level since October 2016, and closer reading of the surprisingly-strong first estimate of first quarter growth showed weakening consumer spending, the bedrock of the U.S. economy. Despite the higher-than-expected 3.2 percent year-on-year growth in U.S. gross domestic product, the yield on the benchmark U.S. Treasury 10-year bond yields has dropped back below 2.50 percent from almost 2.8 percent in January and futures markets are pricing in a rate cut by the end-year. In March the FOMC forecast the fed funds rate would average 2.4 percent this year, sharply down from December’s forecast of 2.9 percent, which implied 2 rate hikes this year. In 2020 the Fed expects to raise its rate once to an average of 2.6 percent, down from December’s projection of an average rate of 3.1 percent, and then maintain this rate in 2021. Inflation is clearly soft, with the Fed’s preferred gauge – the core personal consumption expenditure that strips out food and energy price – flat in March for an annual 1.6 percent while the headline consumer price inflation measure rose to 1.9 percent as both measures are below the Fed’s 2.0 percent inflation target. The U.S. dollar has so far shrugged off the Fed’s dovish policy shift, rate cut expectations and the first signs of slowing growth, likely because other central banks, mainly the European Central Bank, has also turned dovish and while economic growth in the euro area is starting to rebound after last year’s weakness, it has yet to show a convincing acceleration. The dollar fell slightly in response to the Fed’s statement but is still up 1.7 percent this year against the euro at 1.125. After raising its rate 9 times since December 2015, the Fed shifted into a more dovish policy stance in early January by saying it would be patient in future rate changes and was ready to adjust the pace of normalization of its balance sheet if economic conditions were to warrant an easier policy. Since October 2017 the Fed has slowly been shrinking its holdings of some $4 trillions of bonds by allowing $30 billion of Treasuries and $20 billion in mortgage bonds to mature every month. In March the Fed then said it would slow the redemptions of Treasury bonds to $15 billion a month and then stop the runoff at the end of September. As in March and January, the FOMC was unanimous in its policy decision.

The Board of Governors of the Federal Reserve System released the following statement:

Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.